Majority
p. 497SUPREME COURT. John F. Butterworth, Receiver of the Island City Bank agt. William O’Brien and John O’Brien. New - York General Term, September, 1858.
Headnote
Corporations cannot recover back usurious premiums paid by them on the loan or forbearance of money.The proper construction of the statute of 1850, (Laws of 185(5, ch. 112, § I,) which says: “ No corporation shall hereafter interpose the defence of usury in any action,” forbids such recovery.
Present, Davies, Sutherland and Hogeboom, Justices.
This is an appeal from an order of Mr. Justice Sutherland at special term, sustaining a demurrer to the complaint upon the ground that it does not state facts sufficient to constitute a cause of action. The complaint sets forth in due form the appointment of the plaintiff as receiver of the Island City Bank^ a banking corporation; and then alleges that prior to his appointment as such receiver, and within one year past, the said bank has paid and said defendants have received on the loan or forbearance of various sums of money by said defendants to said bank, the sum of $10,000 in excess of interest over
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and above the legal rate of seven per cent, per annum, which he cannot state with precision or particularity, but charges that the defendants can do so. Plaintiff therefore, prays an accounting, to determine the amount thereof, and judgment for that sum. The complaint also contains a prayer for general relief.
Charles A. Peabody, for plaintiff.
I. The highest rate of interest allowed by law in this state is seven per cent., (1 R. S. p. 772, §§ 1 and 2,) all the contracts for a higher rate than that are void. Any excess paid above this rate may be recovered back. (1 R. S. p. 772, § 3.) The excess beyond legal interest could be recovered back at common law, without the aid of the statute. (Wheaton agt. Hibbard, 20 Johns. R. 290.) This is confessedly the case now as to natural persons.
II. The statute of 1850, which enacts that “ no corporation shall hereafter interpose the defence of usury,” does not alter the rate of compensation for the use of money, or legalize a contract by a corporation for a higher rate than that theretofore allowed by law.
III. The “ defence ” of usury in that statute, means a defence used to defeat a claim, for the reason that usury had been reserved or agreed to be paid, concerning it. A defence to a claim or debt by reason of a taint of usury. This is what was understood and meant by “ the defence of usury.” It has no other meaning either in common parlance or .in the books.
IY. A corporation, therefore, is only prohibited by this statute to interpose the fact of usury to defeat a claim, because of the taint of usury. It merely takes from corporations the right to insist on the forfeiture of the debt or claim. The statute was penal in its character. It was so as to corporations as well as natural persons. It is so no longer as to corporations.
Y. The statute does not legalize a contract by a corporation to pay what would be usury, if agreed to be paid by a natural person. • The language used would have been far different if
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that had been intended. It does not repeal the laws against usury as to corporations. It may, perhaps, be said to repeal the penalties against it as to them. It assumes the continued existence of usury as to corporations when it restrains them from interposing it as a defence. The penal feature, or one enforcing a forfeiture, alone is repealed.
VI. There was in existence a system of legislation, the purpose of which was to restrict the rate of interest on money. Ho reference is made to any feature of this system, and no suggestion of an intent to alter this rate. It stands as it was. Seven per cent, is still the highest rate allowed by law.
An evil was perceived, however, which the legislature proceeded to remedy. It was the use made of the “ defence of usury,” by corporations. Hot that the rate of interest as to them was too low or should in any manner be altered. Ho suggestion was made of this kind. But the “ use made of the defence of usury,” was the evil to be avoided, and to which the legislature addressed itself, when this statute was produced. (Curtis agt. Leavitt, 15 N. Y. Rep. 1 .)
These views are the same as those expressed in Curtis agt. Leavitt, (15 N. Y. R. p. 1; see p. 229, opinion of Paige.) He puts his decision of the question of the constitutionality of the law of 1850, as to contracts previously entered into, on the ground that the law as it stood before was penal, and to warrant his decision on that ground, he must have limited the operation of the act of 1850, to that feature of the law or that use of the defence that the act of 1850, only affected it in its penal feature.
So in speaking of the effect of the statute of 1850, he treats only of the defence of usury, and of that as operating to cause a forfeiture ; and treats the repeal (as he terms it) of the former laws as extending only to the penal effect of the statutes. (See p. 229.) The question there necessary to be decided was whether the prohibition against that defence as to corporations related to contracts made before the law of 1850 was passed; and if so, whether it was valid as to such contracts ?
Shankland, page 173, speaking oí this law of 1850, says:
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It does not impair the obligation of a contract, but merely deprives “ the borrower of a defence in the nature of a penalty or forfeitureand, therefore, he says, that it may apply tq prior contracts without the constitutional objection as to vested rights. (See also opinion of Brown, pp. 151 and 152.) He calls the law, which the statute of 1850 prohibits corporations to avail themselves of, “ severely penal in its provisions.” He speaks of the “ penal and savage nature of the act,” and proceeds to say, that the retrospective character of the act does not make it void, because the rights which it took from the corporations were of the nature of a penalty, not vested and of perfect obligation. That case proceeds on the idea that the statute of 1850 affects only the penal feature of the law; and« all the opinions proceed on that idea. In any other view it must under the course of reasoning adopted there, have been adjudged as to that case unconstitutional as operating to divert , a vested right. The result of that case is, that the constitutionality of the law was sustained as to the contract in question made prior to the passage of the law, because it only took away the right to claim a penalty.
Waldo Hutchins, for defendant.
I. A conclusive answer to this action is, that it is brought in fact by a corporation, that is prohibited by statute from interposing the defence of usury in any action. (Laws of 1850, p. 334, chap. 172.)
II. If an action had been brought by the defendants against the Island City Bank, upon an evidence of indebtedness, including interest, at a greater rate' than seven per cent., the bank could not have interposed the defence of usury. The defendants in this action, would in such an action have recovered the full amount.4 But if this action can be maintained in the case supposed, the bank could at once have turned round and sued the O’Briens in the same court in which the original action was brought, and have by the judgment of the court, recovered back a sum of money which had previously by the judgment of the same court been awarded to the O’Briens,
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thus indirectly doing what could not be directly done. This would controvert well established principles of law and lead to a multiplicity of suits, which the law will not tolerate.
IH As we understand the law of 1850, it leaves parties when dealing with corporations, to make their own bargains or contracts as to the rate of interest, and when made, the corporation is prohibited from interposing the defence of usury in any action.
Such has been the effect given to the statute. Many, if indeed not all, the railroad corporations in this state, have issued bonds bearing a greater rate of interest than seven per cent., or if not bearing a greater rate than seven per cent, have been sold at rates greatly below par, thus indirectly allowing more than seven per cent, interest. To allow this action to be maintained, would be to allow in all such cases an action to be maintained by every company, to recover back the excess over and above seven per cent, whenever and as often as paid. And as the bonds are scattered throughout the community, and held by hundreds if not thousands of different individuals, separate actions would be necessary against each, and it would almost become necessary to constitute a court for the trial of such actions.
We are confident the court will not give a forced construction to the statute which will lead to such results. Although the question has not been definitely passed upon by the courts, still it has been in effect decided in the case of Curtis and others agt. Leavitt, reported in 1 Smith’s N. Y. Reports.
Judge Comstock says at page 85 : “ My impression is, that the act, (the act of 1850 above cited,) must be construed as a repeal of the statute of usury as to all contracts of corporations stipulating to pay interest, thus leaving the contracts in full force according to their terms, and that such an act is liable to no constitutional objection.”
If this be so, then it is an end of this case. But besides, there was no law in force at the time the contract was made between the bank and the O’Briens, which made it an illegal contract. Then how or upon what ground after the money
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has been paid, can an action be maintained to recover it back ?
IY. And again, the complaint is defective in this, that it does not set out distinctly the terms of the usurious contract. In 4th of Paige, Vroom agt. Ditmas, the chancellor states the rule to be as follows: “ The defence must be distinctly set up in the plea or answer, and the terms of the usurious contract, and the quantum of the usurious interest or premium must be specified and distinctly and correctly set out, the defendant must prove the usury as laid."
The same rule also applies to a substantive cause of action. ( 12 Barb. 602 .) On this point, also see 8 Paige, 457, where the averment that the party “ had reserved a greater rate of interest than seven per cent, per annum,” was held insufficient. (See also 3 Sill, 564.) The allegation in the complaint in this action is, that the defendants received, “ at least the sum of $10,000,” &c., &c., and then at folio 4, the plaintiff distinctly avers, “ that he cannot state the precise amount of such excess,” &c., and then goes on to state that the defendants can inform him, and prays for an accounting. To allow this action to be maintained, would as the defendants conceive, violate all rules of pleading, applicable to actions brought upon usurious contracts.
This case presents the question, whether a corporation may recover back usurious premiums paid by it on the loan or forbearance of money ? It involves the construction of the act of 1850, which is as follows : “ Ho corporation shall hereafter interpose the defence of usury in any action.” (Laws of 1850, ch. 172, § 1.) Our statute forbids any person or corporation directly or indirectly to take any greater sum than at the rate of seven per cent, per annum, for the loan or forbearance of money. (1 R. S. 771, 772, §§ 1, 2.) And as a consequence of or penalty for the violation of this statute, authorizes any person paying such larger sum to recover back such excess, if the action be brought within one year after the payment. (§ 37.) The benefit of this
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latter section (prior to the act of 1850,) probably attached to corporations. Although it is observable that the second section, which forbids the taking of usury, uses both the words “ person,” and “ corporation,” and extends the prohibition to both, whereas the third section, which authorizes a suit to recover back the usury, uses only the word “ person,” and not “ corporation ;” subsequent sections of the statute, declare void all bonds, notes, contracts, evidences of debt, reserving any usurious premium, (§ 5,) authorize the prosecution thereof to be restrained by injunction, (§ 14,) and make the taking of usury a misdemeanor, (§ 15.) In this shape the statute against usury as amended in 1887, remained until the act of 1850 was enacted, which simply provided that “ no corporation should thereafter interpose the defence of usury in any action.” This statute, like every other of general application, should receive a construction in accordance with the intent of its framers, and in furtherance of the object sought to be accomplished. It was probably intended in part, at least, for the benefit of corporations, to enable them to obtain in critical emergencies pecuniary facilities for the promotion of the objects of their incorporation. They are forbidden to interpose the defence of usury,' and, therefore, when prosecuted upon a usurious contract they were bound to pay or suffer judgment against them. And I think the fair construction of the statute is, that they were bound to pay not only the sum actually borrowed with legal interest, but also the usurious premium. The law creates no distinction between the sum actually borrowed with interest and the excess over seven per cent. It declares that they shall not interpose the defence for any purpose. What they have agreed to pay they must pay. The contract is made legal as to them, by removing every legal obstacle to a recovery against them. Hence, evidences of debt securing or reserving as against them, what would otherwise be an usurious premium, are not void or illegal, but are lawful, and the whole amount may be recovered in an action. If so, then I think it cannot subsequently be recovered back. It would contravene well settled principles and all legal implication, first to all'ow a re
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covery of the usury, and then to allow it to be immediately recovered back. I do not understand that the law allows such 'things to be done. Now in the case of natural persons as to whom the laws against usury are in no wise repealed or modified, they may recover back money actually paid by way of usury; first, because the agreement to pay and the act of payment are .illegal transactions; and secondly, because the law presumes that the urgency of their pecuniary necessities may have left them no practical option except to obtain the money at the time of the original loan on such terms as they could. But if actually prosecuted on the usurious contract, I know of no law or legal rule by which they may suffer a recovery, and then turn immediately round and by a prosecution on their part get back money as to which they had a legal and valid defence against its recovery when originally prosecuted. If these views are correct they dispose of this case. If a suit for the' usurious premiums could not be successfully defended, neither can they be voluntarily paid, or compulsorily collected, and then be restored to the party originally paying them, through the agency of a suit instituted for that express and only purpose. Such is this suit and it must fail for the reasons stated.
Again; the only just or legal foundation, (prior to the statute of 1850,) for the suit to recover back usurious premiums paid, was the illegality of the original transaction, the fact that the receipt of the money by the usurer was forbidden. But the statute of 1850, by prohibiting the defence has removed the taint of usury. It is no longer as to corporations illegal. It has become a lawful and proper transaction; hence the reason of the rule which allowed the action to recover back the money fails. The illegality being removed, the foundation for the action no longer exists.
It is argued that this is giving the statute of 1850 a more extended meaning than was designed by its framers; that it was only intended to take away the defence of usury to prevent the avoidance of a contract otherwise valid, for that cause, and not to pronounce usury lawful or to repeal the law which for
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bids it. It is argued that full effect may be given to the statute of 1850, by preventing a party from defeating a contract on account of usury, or from setting it aside and cancelling if in a court of equity ; and that this is the more benign and equitable construction, and most consistent with the spirit of the law, inasmuch as it compels a party to do just what is equitable, to wit: to pay the money actually borrowed, and legal interest, and relieves him from what is inequitable, oppressive and against the policy of the law.
But I do not find sufficient foundation in the phraseology of the law, upon which to build such a construction. The language is general and unqualified; it takes away the defence and the objection of usury. It strikes it out of existence, and the ordinary consequences must follow. It not only disallows the defence, but it forbids it to be used in any way defensively, that is to accomplish the same object by affirmative action, as for example, in a proceeding to vacate or set aside a contract as would be accomplished by strictly defensive action; as for example, in setting up the usury in an answer to an action on the contract. If it goes this length, and it was rather conceded on the argument that it did, then I think it goes still further and forbids not only a defence to an action for the usury 01 usurious premium, but forbids an action to recover back the usurious premium. The money borrowed, the legal interest and the usurious premium, are all mingled together in one transaction, form part of one single and indivisible contract, and when the statute says, the defence of usury shall not be interposed to it, I think it means to each and every part of it, no one part of it more than another. At least, I feel bound to put that construction upon it until the legislature speak in more specific and discriminating terms.
I think this view of the statute of 1850, is taken in substance by all the judges of the court of appeals, who delivered opinions in the case of Curtiss agt. Leavitt, ( 15 N. Y. Rep. 9 ; see opinion of Comstock, J., p. 85; of Brown, J., pp. 152,154; of Shankland, J., p. 173; of Paige, J., pp. 228, 230; of Selden, J., pp. 254, 255.)
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The result is that the complaint is radically defective and cannot he sustained. It becomes unnecessary, therefore, to consider the other question discussed on the argument, whether the usurious transactions were set forth with sufficient particularity and precision to uphold the complaint as a pleading.
The order of the special term should be affirmed with costs.